Psychological Characteristics and Household Savings Behavior: The Importance of Accounting for Latent Heterogeneity

In brief

Households do not all save for the same reasons, and treating them as if they do hides what drives saving. Using a finite mixture model on a representative sample of 3,382 UK households, we identify two latent groups, striving and established households, and show that psychological characteristics predict savings differently in each, so a single average relationship misdescribes both.

Abstract

We employ a finite mixture model with maximum likelihood (ML) estimation to analyze latent heterogeneity in the relationship between psychological characteristics and household savings behavior. In a one-step ML estimation approach, we estimate a class membership model and a behavioral model of the classes jointly. Adopting this approach enables us to simultaneously assess how socio-demographic characteristics affect class membership probabilities and estimate class-specific regression coefficients, to test whether psychological characteristics predict savings behavior differently across latent classes. We apply this approach to a representative sample of UK households (n = 3,382) and identify two different latent classes: striving versus established households. We find that the relationship between psychological characteristics and savings behavior differs across these two classes, demonstrating the importance of accounting for latent heterogeneity when studying the drivers of savings behavior. Our results have implications for policymakers attempting to improve household savings behavior.

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PDF · Published version (DOI) · More on spending and personality